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A pedestrian walks past a 7-Eleven convenience store in Tokyo. Image: REUTERS/Kim Kyung-Hoon
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7-Eleven's turnaround plan requires heavy lifting to stop Couche-Tard's $47 billion takeover

19 Comments
By Ritsuko Shimizu

Japan's Seven & i Holdings is betting it can boost value by hiving off underperforming businesses and focusing on mainstay 7-Eleven stores. The outcome of its strategy will determine whether it can outmaneuver a $47 billion Canadian takeover bid.

Much depends on the retailer's ability to roll out a new store format in Japan, and improve profit margins overseas, analysts and industry insiders say.

Seven & i plans to split off its supermarket operation and some 30 other "non-core" units into a holding company, York Holdings. It will rename itself 7-Eleven Corp to emphasise its new focus and aims to bring in strategic investors for York and eventually list it.

The shake-up shows Seven & i's determination to ditch the conglomerate discount that has weighed on its shares for years. Poor performance at the supermarket business hasn't helped either, making the Japanese company a ripe target for a takeover bid from Alimentation Couche-Tard Inc, which owns Circle-K.

The Canadian company announced a preliminary bid for Seven & in August, and sources said last week it has since hiked its offer by 22% to around $47 billion. If the deal goes ahead, it would be the largest ever overseas buyout of a Japanese firm.

Given the pressure from Couche-Tard, Seven & i made an "unavoidable decision," to split the business, said veteran independent analyst Akihito Nakai.

"It's the only thing they can do," he said.

Seven & i has said it is "confident" it can unlock shareholder value through a number of strategic actions and has laid out near-term growth targets, including an EBITDA earnings target of 100 billion yen ($670 million) in the next financial year for the York unit.

Still, it's unclear how long shareholders will be willing to wait. Shareholders Artisan Partners and ValueAct Capital have previously called for Seven & i to shed what they said was unnecessary bloat. The Japanese giant employs some 157,000 people worldwide across a business that spans clothing stores, supermarkets and restaurants.

The change in portfolio strategy underscores Seven & i's "urgency to unlock shareholder value," Jefferies analyst Shunsuke Kuriyama said in a note.

In Japan, 7-Eleven stores have become a cultural touchstone, known for a ready supply of fresh food and everything from toothpaste to socks.

The Japanese stores are also highly profitable: the operating margin is 27%, far above the 3.5% of 7-Eleven stores outside of Japan.

Of 7-Eleven's 85,000 stores worldwide, some 21,000 are in Japan, most of them franchises. The Japanese convenience store market is also saturated: moreover, 7-Eleven faces stiff competition from rivals FamilyMart and Lawson.

Same store sales decreased slightly in the six months to September, compared to the previous year.

Reuters reported last month that some 7-Eleven owners are dissatisfied with the company's current strategy, citing concerns about competition from rivals, among other issues.

FAST ROLL-OUT

One area ripe for growth is mini-supermarkets, which are bigger than convenience stores and stock more fresh food.

Rival Aeon has rolled out more than 1,100 of its My Basket stores, focusing on urban areas where there is demand for the format from single and elderly shoppers. Aeon has said it wants to double the number of My Basket stores.

7-Eleven introduced a mini-supermarket of its own, "SIP", in February.

"The testing of the mini-supermarket SIP format is ongoing and will eventually lead to the creation of a second domestic growth division for the business," said analyst Michael Causton of consultancy JapanConsuming.

"Test results are promising and once all set, it will roll out fast," he said in a note on the Smartkarma investor research platform.

The focus on SIP stores shows that Seven & i will need to retain some kind of relationship with the supermarket business that will be spun off into York, said veteran analyst Nakai.

"If they completely separate themselves from the supermarkets, they will not be able to implement the new strategy," he said. "Regardless of capital ties, they need to continue a relationship of cooperation."

OVERSEAS BUSINESS

Fixing the bigger overseas 7-Eleven business may prove tougher.

Seven & i cut it full-year profit forecast by a quarter last week. That reflects "a more challenging environment with customers downgrading purchases", Morningstar analyst Lorraine Tan said in a note following the earnings.

Seven & i appears unable to cut costs fast enough to mitigate the pressure on its margins, she said, adding that cost cutting is central to plans to boost returns at the U.S. convenience store operations.

So far, the company has announced plans to close some 444 underperforming stores overseas. It is also beefing up fresh food offerings in the United States.

It is targeting a return on invested capital (ROIC), a measure of profitability, of 10% by the 2030 financial year from 6.5% last year.

The question now is whether it can deliver soon enough for investors, especially due to a perception that the firm is slow to respond to calls for change.

Turning overseas convenience stores into higher margin businesses like in Japan will take a lot of work, including on merchandising, locations and marketing, as well as logistics, said JapanConsuming's Causton.

"We might see some nice improvements in three years, but five years is the minimum buy-in for the real gains to start showing through," he said.

© Thomson Reuters 2024

©2024 GPlusMedia Inc.

19 Comments
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Rival Aeon has rolled out more than 1,100 of its My Basket stores, focusing on urban areas where there is demand for the format from single and elderly shoppers. Aeon has said it wants to double the number of My Basket stores.

In central Tokyo, I can say My Basket hits that sweet spot between conbini and supermarket for urban residents.

But can 7-11 restructure itself quickly enough to ward off this takeover bid?

It maybe its next owner implementing this strategy.

6 ( +7 / -1 )

The only thing I want to see changed at 7/11 (or any Japanese convenience store) is the sandwiches.

Can we please have proper sandwiches, with brown bread and crusts, and ample filling, unlike the rubbish Japanese sandwiches?

0 ( +11 / -11 )

7 Eleven is just going back home, no worries.

-6 ( +4 / -10 )

7 Eleven can make lots money in Japan if it only adjusts and evolve to what gen X needs and it is not Beer and Soggy Sandwiches.

-4 ( +6 / -10 )

In Japan, 7-Eleven stores have become a cultural touchstone

ROFL...Panicking much? It was American to begin with!

-6 ( +9 / -15 )

You can buy pretty much everything most conbini’s sell at My Basket for less, I’m happy to know of their expansion. I use 711 and other conbini’s for their 24/7 access and locations, but while I see more self check out kiosks at family mart and lawson, I rarely see them at 711’s, which makes no sense because their cash register is basically selecting the method of payment and either inserting cash or tapping the card. What’s the point of having a cashier..?

2 ( +4 / -2 )

I rarely see them at 711’s, which makes no sense because their cash register is basically selecting the method of payment and either inserting cash or tapping the card. What’s the point of having a cashier..?

Yep, go into 711 and you have to do all the work while the muppet behind the till stands about like a third wheel.

I like to take my time going real slow and make them squirm.

-4 ( +6 / -10 )

@syniksan

Isn’t it confusing when the register is touchscreen and facing the customer..? All I really need is a barcode scanner since even cash payment will process the change itself. Maybe asking for the plastic bag part? But I always have my bag with me! X D

-1 ( +3 / -4 )

In Japan, 7-Eleven stores have become a cultural touchstone

Yeah, who needs temples, shrines, castles, anime, manga, ukiyo-e, kimonos, martial arts, tea, ... when you can have a shop? Which sells a limited and in some cases inferior selection of stuff available in other shops.

0 ( +5 / -5 )

I like to take my time going real slow and make them squirm.   

I'm with you. I had one of those muppets tell me to hurry up and insert all my notes at once. I said I'm already doing your job for you and neither getting paid nor getting a discount. There was nothing the muppet could do but wait!

-7 ( +4 / -11 )

  said I'm already doing your job for you and neither getting paid nor getting a discount. There was nothing the muppet could do but wait!

They are 89 percent of the way to total automation but as long as they can use some staff on non living wages they are going with that.

-3 ( +6 / -9 )

Sorry for being noob, but isn’t 7&i the one who need to decide if they will sell or not? What are they trying to stop? I don’t understand.

-3 ( +2 / -5 )

Basically, the company's managers are admitting to the company's owners that they've been doing a pathetic job.

3 ( +5 / -2 )

We have 7/11, for some of the elder local residients and young kinder Kids the staff and other customers may be their all important mental health interaction for the day. as for sandwiches... how did mayo get into all of them, US past? it is late, but I just done non -mayo72++++ hr shift, It is a corporate decision, not for street folks?

-3 ( +0 / -3 )

Stop this bad business..

-6 ( +0 / -6 )

Can we please have proper sandwiches, with brown bread and crusts, and ample filling, unlike the rubbish Japanese sandwiches?

Stop asking stupid things like a kid..

This is Japan, don't like Japan sandwiches??..

You can eat sandwiches in your own country..

Bon Voyage.. LOL

-8 ( +1 / -9 )

Yikes, all these great plans for change was just collecting dust all these years? Maybe 7-11 has it really good in japan, non innovative slow pace but profitable as to be eyed for a take over.

0 ( +1 / -1 )

"7-Eleven's parent company Seven & I Holdings, based in Japan, said in its earnings report that the North American economy experienced persistent inflation, high interest rates and a "deteriorating employment environment.""

There are a lot of problems caused by the skyrocketed inflation/prices caused by Biden/Harris/Democrat economic and energy policies the last four years.

-3 ( +0 / -3 )

Stop this bad business..

Their business, their choice LOOOOOL

0 ( +1 / -1 )

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